Netflix Wasn’t All Wrong
Published: April 2, 2012
by Ken Favaro with Kasturi Rangan
The following highlight very important lessons learned from a very public failure. In less than one month. Netflix’s market cap dropped by 70% and lost over 800,000 subscribers!
"In October 2011, one of the great backflips in the annals of business strategy took place. Netflix Inc., the most prominent video rental service company in the world, had begun to charge separately for its DVD-by-mail service and its streaming service in July, which in effect had increased prices by 60 percent for customers who used both services. Then, in September, Netflix had gone further, announcing it would split those services into two separate businesses, renaming the DVD-by-mail operation Qwikster. Consumer protests, conducted largely over the Internet, forced the retraction in October; Netflix announced it would revert to providing a combined service under one brand.
They DID get some of it right:
• The business split. They got this right. The natural boundaries between the physical (mail) and virtual (streaming) markets for pre-recorded movies are increasingly sharp, especially as the streaming market takes off. These two delivery models require distinct assets and capabilities to be successful, and each faces a very different group of competitors.
• Pricing. They got this right, too. Services that deliver discs by mail have different demand curves from those that stream video content, and they also have very different costs to serve their customers. That’s why different pricing schemes make sense. ….Before July 2011, Netflix had bundled streaming with its core delivery-by-mail service because it was a nascent market and the selection of available videos was limited. The market had not been ready for a stand-alone streaming-only business. During that period, Netflix subsidized the development of its streaming business by essentially giving it away to its DVD-by-mail subscribers. Later, though, with competition from the likes of Apple and Amazon, that would have to change
• Brand management. The company really didn’t think this through. Netflix chose to make explicit the distinction between its two business models by giving them separate brands — Qwikster for the original by-mail business and Netflix for the new streaming business — and requiring separate unlinked accounts. This was a tricky and unfortunate decision.
• Communications: timing is sometimes the hardest part of strategy to get right. Netflix likely judged correctly that its mail business was going to be cannibalized and ultimately replaced by streaming. But no one can really know for sure how fast that might happen. Moving too early can be disastrous, as Netflix learned, but moving too late can be even worse — as companies such as Kodak, Research in Motion, and Nokia have discovered. Second, strategy should be based on how customers behave, not on what they say. Before Netflix announced its change, customers had posted many online messages about the value of switching to streaming. But talk is cheap. Third, when customers have an intense loyalty to a particular product (or service or brand), they become nearly as vested in the product as the company is. Finally, strategy has to be dynamic and iterative. Customer reaction to any change in a company’s value proposition is difficult to know a priori, even with the best market research. Having the agility to change your choices when new information comes to light is essential to strategy success. This type of agility, no matter what mistakes Netflix made, may save the company in the end"